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Good Morning, this is Capital Essence’s Market Outlook (the technical analysis of financial markets) for Friday January 12, 2018.

Stocks closed higher Thursday as traders bet global economic growth would pick up steam. The Dow Jones industrial average rose 0.81 percent to 25,574.73.  The 500 gained 0.7 percent to finish at 2,767.56.  The Nasdaq composite also hit a record high, rising 0.8 percent to 7,211.78.  The CBOE Volatility Index (VIX), widely considered the best gauge of fear in the market, rose 0.61 percent to close at 9.88.

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One of the more noteworthy developments in recent days has been the move in Healthcare sector.  Among healthcare ETFs, one ETF following the sector is the Health Care Select Sector SPDR ETF (XLV), which is up 0.43% on the day, and up 4.2% YTD, outperformed the S&P.  Now the question is whether the rally has more legs?  Below is an update look at a trade in XLV.

The graphics below are from our “U.S. Market Trading Map”, show the near-term technical bias and trading ranges.  As shown, the underlying is in a short-term bullish trend when the price bars are painted in green.  The underlying is in a short-term bearish trend when the price bars are painted in red.  The yellow bars identify period of neutral or sideways trading pattern.  Additionally, the light-blue shading represents the short-term trading range.  A move above or below that range is considered overbought (as represents by the red shading) or oversold (as represents by the dark-green shading).  Readings above or below the red and green shaded areas are considered extremely overbought or extremely oversold.

Chart 1.1 – Health Care Select Sector SPDR ETF (weekly)

Our “U.S. Market Trading Map” painted XLV bar in green (buy) – see area ‘A’ in the chart.  XLV has been on a tear in recent days after the late December pullback found support near the 2017 rising trend line.  This week’s rally confirmed last week’s breakout above the prior high set in October 2017.  This is a bullish development, supporting further upside follow-through and a test of the more important resistance near 90, based on the 127.2% Fibonacci extension.

XLV has support just below 83. Short-term traders could use that level as the logical level to measure risk against.

Chart 1.2   – S&P 500 index (daily)

Short-term technical outlook remains neutral.  Last changed January 10, 2018 from bullish (see area ‘A’ in the chart).

[Note: for more details analysis, please take a look at our “US Market ETF Trading Map”]

Thursday’s upside follow-through confirmed Wednesday’s bullish reversal signal.  Today’s rally pushed the S&P above the lower boundary of the red band, clearing an important hurdle.  This is a bullish development but let’s notice that the rally has created overbought conditions.  RSI had reached the highest level since spring 2017 following recent advance.  As mentioned, while overbought condition is normal during long-term uptrend, it’s suggested that upside momentum might not sustain without at least a breather.  Adding to concerns is the lagging Money Flow measure.  The indicator is still below the November’s peak as prices ascending.  This negative divergence suggested that less and less money are chasing stocks higher.  So, we’d be cautious against taking large position at this stage of a rally.

Short-term trading range: 2755 to 2800.  S&P has minor support near 2755.  Below it, a more significant support lies at 2700.  This creates a strong band of support between 2740 and 2700.  A failure to hold above 2700 suggests that most of the potential buyers at this level had already placed their bets.  The next batch of buyers typically sits at a much lower level, around 2600.  The upper boundary of the red band, around 2800, represented key resistance.  A close above that level often marked significant short-term market tops.

Long-term trading range: 2630 to 2760.  Unless there is a headline that everyone recognizes as extremely positive or negative, expect S&P to swing within this 130 points range.

In summary, the fact that the S&P is overbought as it climbed above key price level that had been successful in repelling price action in the past suggested that upside gains could be limited.  As for strategy, traders should consider buying into market dips rather than chasing breakouts.

 

Thanks and happy trading.

 

(By:Michelle Mai for Capital Essence)

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